House of Representatives

Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 3

Administration

Outline of chapter

3.1 Schedule 1, Part 3 of the Bill amends the APRA Act to provide APRA with the function of administering the Financial Claims Scheme (FCS) and establish financial and other arrangements to perform this function.

3.2 Schedule 1, Parts 4 and 5 of the Bill set out consequential, application and transitional provisions relating to the FCS.

Context of amendments

3.3 APRA's existing purpose, functions and powers (as specified in sections 8, 9 and 11 respectively of the APRA Act) have a prudential regulation focus. Similarly, under section 12 of the Banking Act, APRA has a duty to exercise its powers and functions under Division 2 of that Act for the protection of the depositors of the several ADIs and for the promotion of financial system stability in Australia.

3.4 As a result of its prudential regulation role, APRA is familiar with financial institutions and their systems and is well placed to do the necessary preparatory work and to test the scheme's implementation.

3.5 APRA's role is expanded to include administration of the scheme and development of the administrative practices and procedures to be applied in performing its regulatory role.

3.6 APRA's specific powers and responsibilities with regard to the EAFD and the PCF are established in the Banking Act and General Insurance Act.

3.7 The Bill also establishes the funding and accounting arrangements for administering and making payments under the FCS, and updates the requirements around APRA's annual reporting arrangements to reflect the existence of the FCS.

3.8 The arrangements include the use of the Financial Claims Scheme Special Account for funding payments to depositors of policyholders benefiting from the scheme and the APRA Special Account for scheme administration costs.

Summary of new law

3.9 In addition to its previously existing functions, APRA is responsible for administering the FCS.

3.10 The Bill establishes Financial Claims Scheme Special Account and, subject to the Finance Minister's approval, allows APRA to borrow on behalf of the Commonwealth to help fund the amounts appropriated to meet depositor or policyholder entitlements on activation of the Financial Claims Scheme.

3.11 Amounts appropriated on activation of the scheme for its administration costs are handled through a separate APRA Special Account

3.12 APRA's annual reporting arrangements are updated to require it to include information on the operation of the scheme in relation to ADIs and general insurers.

Comparison of key features of new law and current law

New law Current law
APRA's purpose is extended to include administration of the FCS. APRA purpose relates to prudential regulation and retirement income standards.
Subject to the Finance Minister's approval, APRA is able to borrow on behalf of the Commonwealth to help fund the cost of FCS entitlements.
Financial Claims Scheme Special Account is established to account for the funding of payments to depositors of policyholders under the FCS.
The costs of administering the FCS are accounted for in a separate APRA Special Account.
APRA is required to include information about the operation of the FCS in its Annual Report.

Detailed explanation of new law

APRA's functions and powers

3.13 APRA's existing purpose (as specified in section 8 of the APRA Act), functions (section 9 of the APRA Act) and powers (section 11 of the APRA Act) have a prudential regulation focus.

3.14 Under section 12 of the Banking Act, APRA has a duty to exercise its powers and functions under Division 2 of that Act for the protection of the depositors of the several ADIs and for the promotion of financial system stability in Australia. When undertaking its role as scheme administrator, APRA should have regard to these objectives and responsibilities.

3.15 The Bill extends APRA's purpose to include administering the financial claims scheme and developing the administrative practices and procedures to be applied in performing its regulatory role. [Schedule 1, item 38, subsection 8(1)]

Funding arrangements

3.16 Payments to eligible depositors and policyholders under the FCS will initially be funded by the Commonwealth through an appropriation. These funds will be recovered in full through the liquidation of the failed institution, and, if necessary, by imposing a levy on the remaining firms within the relevant industry.

3.17 The legislation allows for the Treasurer to activate a maximum appropriation of up to $20 billion per failure. For the first three years the appropriation in relation to the EAFD will be unlimited.

3.18 Subject to the Finance Minister' approval [Schedule 1, item 49, Division 2, section 54E] , APRA may borrow money on behalf of the Commonwealth. The amount borrowed must not exceed the amount specified in the Ministerial determination activating the scheme. In turn, this amount cannot exceed $20 billion. [Schedule 1, item 15, section 16AD; item 26, section 62ZZC]

Financial Claims Scheme Special Account

3.19 The Financial Claims Scheme Special Account is established as a Special Account for the purposes of the Financial Management and Accountability Act 1997 [Schedule 1, item 49, section 54A] . The Financial Claims Scheme Special Account is defined accordingly. [Schedule 1, item 37, subsection 3(1)]

3.20 All amounts received by APRA, on behalf of the Commonwealth, via an appropriation and/ or under an approved borrowing arrangement to fund payments to depositors or policyholders must be credited to the Financial Claims Scheme Special Account. Amounts specified in the declaration activating the scheme, amounts borrowed and amounts appropriated for the purposes of the FCS can only be spent for the purposes of the Financial Claims Scheme Special Account. [Schedule 1, item 49, section 54B]

3.21 The purpose of the Financial Claims Scheme Special Account is to make:

·
payments to eligible depositors and policyholders under the Scheme; and
·
repayments of any loans (the principle and interest) entered into using the borrowing power. [Schedule 1, item 50, section 54C]

3.22 If a declaration by the Treasurer which activated the FCS is amended, this must be reflected in the amount credited to the Financial Claims Scheme Special Account. [Schedule 1, item 49, subsection 54B(2) and section 54D]

APRA Special Account

3.23 The definition of the APRA Special Account is inserted and previous references to "the Account" are amended to refer to the relevant account(s) to reflect that there are two special accounts pertaining to APRA's functions. [Schedule 1, items 36, 40, 42, 43, 45]

3.24 Amounts received under an appropriation for the costs of Scheme administration will be credited to the APRA Special Account. [Schedule 1, item 46, subsection 53(e)]

3.25 For avoidance of doubt, it is made clear that any amounts for the purpose of the Financial Claims Scheme Special Account are not to be credited to the APRA Special Account. [Schedule 1, item 49, subsection 54B(2)] Further, any amounts standing to the credit of the APRA Special Account cannot be used for the purposes of the Financial Claims Scheme Special Account [Schedule 1, item 48, subsection 54(3)] .

Special appropriations

3.26 Two standing special appropriations are authorised for the purpose of the FCS. These appropriations can be activated by a declaration by the Treasurer which will specify the maximum amounts to be appropriated.

3.27 The first standing special appropriation is for the purpose of making payments to depositors and policyholders. The maximum amount of this appropriation is $20 billion. For the first three years of the EAFD, the appropriation is unlimited. This amount is to be credited to the Financial Claims Scheme Special Account. [Schedule 1, item 49, section 54B]

3.28 The second standing special appropriation is for the purposes of administering the scheme. The maximum amount of this appropriation is ($100 million). This amount is to be credited to the APRA Special Account. [Schedule 1, item 46, subsection 53(e)]

3.29 The appropriation mechanism for the FCS will ensure that it can be established and make payments in an effective and timely manner once activated.

Borrowing power

3.30 APRA is authorised to borrow money, on behalf of the Commonwealth, for the purposes of making payments and administering the Financial Claims Scheme. [Schedule 1, item 49, section 54E] The borrowing power has the following features:

·
borrowing is only authorised in circumstances where the Treasurer has activated the FCS and made a determination of the FCS payment costs in respect of that failure (that is, the money appropriated to APRA, for the purposes of making payments to depositors and policyholders, via the first special appropriation mechanism);
·
the amount borrowed for a specific failure is limited to the total amount of the Treasurer's determination(s) of the cost of payments to be made under the scheme for that failure [Schedule 1, item 49, paragraph 54E(2)(a) and subsection 54E(3)] ; and
·
the length of the loan agreement is limited to 12 months. [Schedule 1, item 49, paragraph 54E(2)(b)]

3.31 The terms and conditions of any loan agreement are subject to the written approval of the Finance Minister prior to APRA entering into an agreement. [Schedule 1, item 49, subsection 54E(1)]

·
The Finance Minister has the ability to delegate this power. [Schedule 1, item 49, subsection 54E(5)]

Financial Claims Scheme levies

3.32 Any money raised through an industry levy under the Financial Claims Scheme (ADIs) Levy Act 2008 and Financial Claims Scheme (General Insurers) Levy Act 2008 , are payable to the Commonwealth and must not be credited to the Financial Claims Scheme Special Account or the APRA Special Account. [Schedule 1, item 41, subsection 50(6); item 44, paragraph 53(d)]

Amounts received in liquidation

3.33 Any amounts recovered by the scheme administrator from liquidation are to be returned to consolidated revenue and must not be credited to the APRA Special Account or the Financial Claims Scheme Special Account

Annual report

3.34 APRA is required to include information about the operation of the FCS in relation to ADIs and general insurers in its annual report. [Schedule 1, items 50, 51, section 59]

Application and transitional provisions

3.35 The responsible Minister under the Banking Act 1959 is permitted to make a declaration in relation to an ADI or general insurer subject to the satisfaction of commencement and condition requirements. [Schedule 1, item 15, section 64AD; item 26, section 62ZZC]

3.36 A transitional period of 18 months is provided for disclosure requirements under the Corporations Act 2001 , for matters related to the operation of the FCS. [Schedule 1, item 62]

Consequential amendments

3.37 Consequential amendments required for the administration of the FCS include:

·
Amending the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act) for decisions made by APRA in relation to the payment from the FCS. [Schedule 1, Part 4, item 53, paragraphs (hc) and (hd)]
·
Amending the Corporations Act 2001 to include a reference to APRA for the purposes of the powers of Companies Auditors and Liquidators Disciplinary Board in relation to auditors and liquidators. [Schedule 1, Part 4, item 54, subsection 1292(2)]
·
Amending the Financial Institutions Supervisory Levies Collection Act 1998 to provide for APRA's collection of industry levies under the Financial Claims Scheme (ADIs) Levy Act 2008 and Financial Claims Scheme (General Insurers) Levy Act 2008 . [Schedule 1, Part 4, items 55, 56, 57, Parts 2, 3 and 3A] For constitutional reasons, each levy requires its own Act. The levy collection mechanism is similar to those already in place for the various financial institution supervisory levies that essentially funds APRA's prudential supervision operations and the Financial Assistance Levy relating to the superannuation sector.
·
Amending the Income Tax Assessment Act 1936 [Schedule 1, Part 4 item 58, subsection 202(q)] and Taxation Administration Act 1953 [Schedule 1, Part 4, item 60, subsection 8WB(1A)] to account for the use of tax file numbers in the administration of the FCS. A separate chapter of this Explanatory Memorandum addresses these amendments.
·
Amending the Reserve Bank Act 1959 to allow the disclosure of information relevant to the Minister's decision in relation to the declaration activating the financial claims scheme in relation to a general insurer. [Schedule 1, Part 4, item 59, subsection 79A(2)]

3.38 The amendment of the ADJR Act exempts from review under the ADJR Act decisions made by APRA, as administrator of the FCS, in relation to: the dollar amounts of individual entitlements of depositors under the FCS; and decisions as to whether a person has a valid claim against an insurer under the FCS as it relates to insurance.

3.39 This helps ensure that the scheme can be administered in a seamless and timely way. If depositors were able to challenge the decision of APRA about individual entitlements and amounts received, there is the potential to delay finalisation of payments to all depositors which could significantly complicate the management of the failure.

3.40 Similarly, the FCS is designed to ensure that eligible insurance claims are paid in a normal timeframe, rather than in the liquidation stage which is considerably more drawn out. As such, any mechanism which reviews APRA's decision to pay claims in a normal timeframe would seem to undermine the point of the FCS.

3.41 Curtailment of ADJR Act review rights does not in itself prevent a policyholder from pursuing what they believe is owed to them through the liquidation process.


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